Hello, my friends. Today is October 25th and this is Markets Weekly.

So, this past week was a pretty exciting week in markets. We had the S&P 500 make new all-time highs.

You know, who knows, maybe we really will get to 7,000 by the end of the year, as many are expecting.

Now, the latest upward impulse comes from better than expected CPI data, which we finally got on Friday.

Now, from my perspective, I think inflation data is kind of boring because when you zoom out a bit, on a year-over-year basis, CPI has basically been around 3% for over a year.

Now, at every month, some components are a little bit hotter, some components a little bit cooler.

For this month, it was shelter, but you know, big picture is we're in a 3% inflation regime and have been for some time now.

The White House is also suggesting that we won't get the next CPR report because of the government shutdown.

So, you know, um I guess we'll just assume that it's great.

Something else that happened this week was that we had some positive news on the US China trade discussions.

Now, there was some concern that China would be weaponizing their rare earths. Maybe they would use that to impact the stock market, get them some negotiating leverage.

But we also had news this week that Trump will be meeting President Xi next week in Korea.

Now, from my perspective, that's really good news because knowing the president, he would only have a meet if he had an idea of what would happen and he can announce good news.

So that doesn't mean that we'll have a great deal, but from my perspective means that we won't have bad news.

So that is of course uh positive for the markets.

Now today, let's talk about three things.

First off, now given that CPI has been better than expected, the market fully prices in two cuts this year, and the 10-year yield has gone down to around 4%.

Mortgage rates are now at 2-year lows, just a little bit above 6%.

Let's talk about how that could impact the housing market.

Um, secondly, so this Sunday is kind of a big week in Argentina because we're having the Argentinian midterm elections.

Now, usually this is not something anyone cares about, but uh at the moment, this administration is doing a lot to help Argentina uh lending them billions of dollars to prop up their currency.

Let's talk about what the US is doing and how it plays into a greater geopolitical strategy the president has in mind.

Lastly, the big big exciting price action the past week was of course in gold and silver, which totally imploded earlier in the week.

Now just last week we were talking about how they were going parabolic and you know you don't know how high you go but you do know that you will implode and that looks like it happened.

So let's see about talk a little bit about what happened there.

All right. Um starting with the housing market.

So again taking a step back over the past few years we've had mortgage rates go super high as high as above 7% and housing has definitely been in a recession.

Now, house prices haven't really gone down that much. They've actually continued to go up slowly, but transactions have been low and a lot of people are complaining about affordability.

Consumer sentiment surveys show that it's a really bad um time to be buying a house.

Now, one of the main channels where monetary policy is supposed to affect the economy is through interest rate se sensitive sectors like um like housing.

Now, when you raise interest rates, a whole bunch of things happen.

You know, everyone reacts differently. It's a it's a complicated system.

Now, in theory, maybe if interest rates are at 4%, you'll put your money in a money market fund rather than go, I don't know, see a Taylor Swift concert or something like that.

Pretty sure that's never happened, but you know, that's the theory.

But one more concrete tangible thing that happens is that uh finance purchases that you usually finance, be it cars or be it homes, uh usually take a hit when interest rates go higher.

And that really was uh very concrete in the housing sector.

It didn't really affect the stock market too much. Um but again, every sector, every person is different.

Now, the way that housing feeds into the economy, I think of it as three segments.

First off, the most important segment of course is new construction.

Now, GDP is when you was when you produce more goods and services uh in a year.

When you build a house, you have to hire people. You buy a whole bunch of materials. You got appliances and all that stuff.

So, uh, building a new construction home has a big impact on GDP and it multiplies through all sorts of industries related to housing.

So, that's pretty important lever.

Uh, secondly, you have existing home sales.

So, that's homes that are already built but then get sold.

Let's say someone is living in an old home, sells it to buy another old home.

Now, when you have interest rates go down, uh there's more turnover in existing homes and that helps uh brokerage commissions basically.

So, you give brokers work do not a huge part of GDP, but it's something.

And the third part I think that um housing affects the economy is through refinancing.

That means your monthly payment goes down and so uh you have more disposable income that you could spend on other things.

it it's kind of like um you know indirect stimulus to uh borrowers.

So right now at let's say 6.2 63 mortgage rates we can see potentially that we could have some impact on these three channels but from my reading very very limited.

Now starting with home construction.

Now the best way to get data on this is to just listen to what the home builders are saying.

Now, this past week, we had PY Homes, a large publicly traded home builder, come and talk about uh what they're seeing on the ground.

And from perspect their perspective, it's pretty clear that yes, mortgage rates have come down, but it's really not helping that much.

Uh from their perspective, they think that yes, rates have come down, but people are worried.

The economy doesn't seem to be doing that well, and they're worried about job security.

So, uh it doesn't seem to have helped that much.

And of course, they are building uh fewer homes than they were before.

Now, something else worth noting is that even though interest rates have come down, for someone who's buying a new construction home, it's not going to make a really big difference.

What the new what the builders have been doing over the past couple years is that they've been offering incentives to entice uh people to buy new homes.

Those incentives come in the form of interest rate buydowns.

So, let's say that the market rate of a of a of a mortgage rate is 7%.

If you buy it, if you buy a new construction home, maybe the builder will buy it down to 6% 5 a.5%.

So, they've been selling uh they've been buying down rates the cost of lower profit margins.

And you can see this in PY Homes's uh quarterly presentation. Their margins have come down.

Now when interest rates go down a something the other builders like LAR are saying is that you know rather than just you know continue the buy down at the same rate so the ultimate home buyer has an even lower mortgage they'll just uh spend a little bit less money on the buy down so that homeowner home buyer is still going to face a 5.5% mortgage.

It's just that the builder is going to spend less money to buy down the mortgage and have higher profit margins.

So, they're going to protect their margins.

The new home buyer is going to face basically the same post incentive rate.

So, uh given so it doesn't seem like uh the mortgage rate decline is going to have too much impact on new home construction.

Uh what about um resale homes?

Now, resale homes have been ticking up a little bit higher. um slightly, but when you zoom out and look at the data, you can see that it's really not that much of a difference.

So, yes, when you have uh interest rates coming down, you're going to help on the margin.

Some people buy uh new resale homes, but really, historically speaking, interest rates are quite high and the economy does seem to be slowing or at least people are concerned about that.

So, the help it's been having some impact, but really not a lot.

What about the third path, refinancing?

Now, I've been reading some headlines saying refinancing activity, you know, a gazillion% higher than year-over-year.

But that's super super misleading because when you look at the universe of mortgage rates outstanding, the majority of people have mortgage rates that are, you know, below 4%, below 5%.

Only about say 15% of people have mortgage rates above 6%.

So, if mortgage rates today are about, you know, 6.2 2 6.3%. Yeah, it's going to make sense for someone who took out a 7% mortgage last year or a couple years ago to refinance, but for the vast majority of people, it's not just it's not going to make sense.

And to be clear, if you have a let's say hypothetically speaking, if you have a 6% mortgage and then mortgage rates drop to 5.9, you're not going to refinance.

That's not how the world works.

Uh the research that I've seen on this topic suggests that uh the rates have to be about 75 100 basis points lower uh than your own mortgage for you to actually refinance.

Now part of that could be that when you refinance you also have to pay a couple percent in and refinancing costs, but I think for a lot of people, you know, it's just not worth the hassle.

So even if mortgage rates were down to say 5 a half%, you probably won't have that much of a difference.

you probably have to get it uh even lower than that and u just doesn't seem to be happening.

So, uh, from what I see, mortgage rates have come down, could continue to come down, but probably not going to make that much of a difference to the housing sector, all three channels, uh, for the foreseeable future.

But we'll see.

Uh, the president is seemingly launching some new initiatives, emergencies, and so forth.

And they are very creative bunch.

Which leads us to our second topic.

Now the white house know secretary Besson has been moving mountains for uh President Javier Mille of Argentina.

So taking a step back Argentina obviously historically has had a lot of problems with inflation and economic mismanagement.

And so finally the Argentinian people elected Javier Mille who memorably goes around with a chainsaw telling everyone that he's going to implement austerity and get inflation under control.

And true to his word, he did fire a whole bunch of people and he did help Argentinian inflation get down to more reasonable levels.

Now, part of the recipe, part of his plan is to have a stronger than should be Argentine peso.

Uh that would kind of stabilize import costs, maybe help in the inflation effort.

Uh but the problem is that when you have a currency that's stronger than what the market would like then you have depreciation pressure which is what the Argentinian peso has been suffering over the past few months.

Um, part of this is of course that there seems to be some sense that Javier Mle is having less political support and so if his party and his supporters were to lose power then maybe you would have the old regime come back a lot more big spending and so forth and you know bad for bad for um economic growth there maybe pesa was going to continue to depreciate so people are front running that in any case.

has been trying to shore up their currency and he took a 20 billion loan from the IMF.

But of course, that's not enough because your currency is too strong relative to what the market would like it to be and you don't want it to be weak because you want to control inflation.

So, Javier Mle has been asking the White House for support and strangely enough, the White House has given support.

Now, they've offered Argentina a 20 billion swap line and reports suggest that uh they're also invening in the currency markets, selling dollars, buying pesos.

Now this is you know really quite extraordinary because I don't think any uh previous administration would be doing that.

Now looking at this chart you can see that these interfations have been having some impact but there are only short-term impacts because the ultimate problem is that the market is not confident that the Malay reform agenda can survive.

Now this Sunday there's they're going to have midterm elections in Argentina.

If the election results are unfavorable to the president over there, then you know no amount of money is going to save the peso because people are going to assume that Argentina is going to go back to um its old ways.

So another interesting chart you can look at is how Argentinian dollar bonds are trading.

So these are bonds these don't have currency risk in sense they're kind of default risk.

Um and you can see that they've been fluctuating in line uh with aid from the White House and perceptions of uh Javier Mille's political fortunes.

Now I think if you take a step back and look more broadly at what the president is doing, this is very clearly part of a uh fundamental shift in geostrategic alignment.

Whereas the president is focusing more on the Americas.

It's a revival of the old Monroe doctrine which basically says that the US will have uh control over the Americas and you can see this in what the president is doing in Venezuela you know just casually sending boats there bullying up uh smuggling boats and also this past week floating out the possibility that hey maybe we'll have land troops there in Venezuela.

So, as we all know, the government in Venezuela is not friends with the Trump administration and to be frank is, you know, doing a really bad job and led to a huge refugee crisis of Venezuelans.

But you can also see how the president is acting pretty aggressively to the president of Colombia this past week, sanctioning him.

He is, of course, someone who is uh, you know, not friends with the president.

And of course uh a few weeks ago we have the president uh being you know kind of aggressive towards uh Brazil and President Lula over there because they were treating President Bolsinaro who was President Trump's friend and former president of Brazil very poorly.

So in many ways the United States is exerting a lot more control over the Americas and it's not shy in using its both its financial firepower and its military might to do that.

So I think this is something that is uh just a big shift in how things are going to work and this is just the first year in the Trump presidency.

We have a few more years, maybe more than a few more years.

We'll see.

Um so I think that that's a kind of an interesting alignment and you know maybe maybe it will be good for some of those countries.

It's certainly been good for Argentina if he can support this reformist path.

And one thing I'll note is that it's just $20 billion.

This is for a country the size of the United States.

that's really really nothing and if it's able to shore up an ally in Argentina which is a country very rich full of natural resources that seems to be a pretty good investment and also the president suggested that if Malay uh was not uh if election didn't go the right way maybe you wouldn't have lines so incentive for other for the voters down there to think about that.

all right the last thing that I want to talk about is of course gold and silver now just Last week we were talking about how gold and silver had seemingly gone parabolic.

And when you're in these parabolic phases, you know, they can go, you know, higher than anybody can expect it.

Uh but historically speaking, they will implode and you don't know when that would happen.

So it's always a hard decision.

Should you stay in? Should you get out?

You know, it's a very painful thing to get out and only to see it go higher than you can ever expect and then everyone around you get rich.

But then when you stay in, you also have the pop run the risk that it will suddenly implode.

And that's kind of what happened early last week.

So we saw gold come down, you know, 5%, silver even more.

It was one of the largest down moves used in those meadows for for over a decade.

So definitely a very painful episode for many people.

Now there were many narratives surrounding the rise of gold and silver.

You know, like we discussed last week, you know, at the end of the day, it's just momentum.

Like a lot of people have a lot of reasons to buy something.

Uh but they buy it, price goes up, so they lever up and buy more.

More leverage leads to higher gains, but also makes it more fragile.

And you can see this in the options uh data in GLD as well.

GLD options will absolutely surging.

Again, this is reminiscent to a lot of things we see in the meme stock world.

A lot of people buy calls and so forth and goes or you can even buy puts to protect your gains.

Um but of course well when the volatility goes down or maybe the puts decay that leads to upward pressure as people buy back their hedges and so forth.

So they basically squeeze this higher and in from a cash basis.

You can also see that there have been tremendous inflows into GLD as uh more and more investors chase it.

Now, as it implodes, we do see some notable outflows.

And historically speaking, you know, when you look at something that like this, you you don't really want to buy it because you have to go through a consolidation phase as it gradually digests the gains and then resumes it uptrend.

Now for gold, a really natural commonly uh kind of a pullback point would be it 50-day moving average which you can see is around 37 3,800 notably lower than we are today.

So one scenario is for gold you know you just kind of consolidate sideways maybe for a few weeks maybe a few months and uh then maybe resume trend upwards.

That's certainly what it's been doing uh for the past several years.

For silver though, I think that's a whole another story.

As we've been talking about, uh, part of the squeeze in silver is just this tremendous bizarre squeeze in London and part of it is fear of tariffs that US might impose and and so forth.

So silver, if you look at historically, it tends to go straight up and then it tends to go straight down.

So whether or not silver will behave like gold, just consolidate on the right, consolidating and go up, you know, that historically it hasn't done that.

So, uh, we'll see what happens.

Again, I don't know what the future holds.

Maybe we just go straight up to alltime highs.

Uh, but historically speaking, that doesn't happen.

Now, this coming week is going to be a super super exciting week.

We have a Fed meeting. We have President Xi and President Trump meeting and we also have a bunch of Max 7 earnings.

So, this next come next week is going to be super super exciting.

And of course, after the Ted meeting, I'll be back to give you my thoughts.

So guys, can't wait for next week and I'll talk to you all soon.